Considerations For Building A Web3 dApp That’s Compliant By Desig

Web3 is on the way into the mainstream, and while its progress can only delight proponents and enthusiasts, it also means that projects building in the industry need to be more careful. As Web3’s adoption accelerates, legal concerns and compliance will become vital considerations for the success of decentralized blockchain applications.

Supporters of Web3 believe that the industry is set to significantly disrupt traditional systems in industries such as banking, real estate, education, healthcare, and more. These industries are currently dominated by centralized institutions and corporations that hold large amounts of information that allows them to exercise control over the market. Blockchain could redress that balance, leveling the playing field and enabling smaller players to make their presence felt.

Web3 Legal Considerations

Although there are very few regulations specifically for Web3, developers in the industry can utilize existing laws to guide them toward building compliant platforms.

One of the most important considerations for any Web3 project is AML, or Anti-Money Laundering, which refers to a set of laws, regulations, and procedures that are designed to prevent money laundering. Criminals often use complicated schemes to hide the true source of their illicit funds, and AML laws can help to detect such activity. For instance, they require institutions to implement stringent policies and procedures that enable them to detect and report suspicious transactions.

If we recall the collapse of the FTX exchange in late 2022, which went bankrupt owing investors billions of dollars worth of crypto assets, this scandal would almost certainly have been prevented had it adhered to AML protocols.

Another key consideration for Web3 projects is Know Your Customer, or KYC, which is the process used by traditional financial businesses to verify the identity of their customers. KYC checks involve collecting and verifying the user’s identities to ensure they are who they say they are. By identifying customers, institutions and law enforcement agencies have a way to trace anyone involved in illicit activities such as money laundering and fraud.

KYC generally involves gathering documents such as the customer’s ID card, driving license or passport, and sometimes also a document that proves their address.

By combining AML and KYC measures, financial institutions and businesses play an important role in preventing money laundering, terrorist financing, scams, and other crimes. As such, Web3 businesses need to consider how they can comply with these laws, even if they’re not yet governed by specific Web3 regulations.

Other considerations for Web3 projects include securities laws. In the U.S., the Securities and Exchange Commission has strict laws for projects engaged in initial coin offerings and similar financing initiatives. Developers have to design their tokens carefully to ensure they comply with securities laws, or else face the prospect of significant fines and other penalties.

Money transmission laws may also apply to some Web3 projects, especially those that handle payments. Privacy laws such as the EU’s GDPR are also likely to be relevant to how Web3 dApps handle their user’s data, and tax laws will doubtless be another requirement.

Some Web3 projects may have to be aware of consumer protection laws too, as false and deceptive advertising can result in legal consequences, while gambling laws may also be applicable for some kinds of dApps.

Building Compliant dApps

Web3 projects would do well to consider compliance from the start. Many startups fail to do this, rushing their products out without thinking about the legal implications. This can cause numerous headaches down the road, as companies later come under pressure to ensure their products are compliant with applicable laws and regulations.

By factoring in compliance from the start, teams can avoid many of these headaches. Web3 projects should seriously consider having someone at the table who has a background in compliance when they first begin outlining new product ideas. This will allow them to integrate compliance into the overall design of their products. For instance, if a team is building a dApp that collects, stores, and analyzes user’s data, they will almost certainly be subject to local privacy regulations. Therefore, it makes sense to make that dApp compliant from the start, before spending millions of dollars on its design and development.

Projects can also follow the exciting best practices for compliance in traditional industries. The U.S. Department of Justice has published a document called "Evaluation of Corporate Compliance Programs" that outlines the standard that all technology firms should adhere to, in order to evaluate the maturity of their compliance programs.

Compliance By Design

Some Web3 projects are attempting to tackle compliance head on, even before official regulations governing the industry are developed and implemented. As an example, the MANTRA blockchain was designed by working closely with regulatory bodies in financial markets to ensure that it adheres to the regulatory requirements of traditional finance.

MANTRA has implemented regulatory compliance at the protocol level, and has applied this framework to its new decentralized exchange platform, which will launch later this year as one of the world’s first, fully-compliant DEXs. Developers who build on the protocol can similarly take advantage of its compliance primitives to build fully compliant dApps from the get-go.

To ensure projects can comply with local regulations and guidelines, MANTRA has built a set of tools and services that developers can use to ensure they comply with various regulations around financial transactions and similar activities. The goal of MANTRA is to provide a streamlined and automated way for Web3 projects to ensure they adhere to the relevant regulatory standards.

By enabling the real-time tracking of transactions on its blockchain platform, MANTRA makes it easier for Web3 projects to detect and put a stop to any fraudulent activities.

To adhere to the principle of decentralization, MANTRA has created a clever system for users to pass KYC checks that doesn’t mean they have to compromise their privacy. Its on-chain decentralized ID, or DID system allows users to efficiently verify their identity with a third-party KYC service provider. Once they have passed this check, they’ll be issued with a Soulbound NFT that verifies their identity. Users can then use this Soulbound NFT to verify their identity on any platform built on MANTRA, without having to reveal their identity or go through the KYC process every time.

Taking The Initiative

While regulators are responsible for defining the laws and regulations that will ultimately govern digital assets, it is a slow process. DeFi has been around for years already, yet it’s only now that many jurisdictions have begun the process of outlining regulatory frameworks for the industry, and it may well be several years before most countries have established rules in place.

As such, the onus is on entrepreneurs and project founders to consider what those frameworks will eventually look like. For many projects, it therefore makes sense to adhere to the existing rules and regulations that Web3 compliance will ultimately be based on.

One clear thing is that a lack of trust and credibility will only result in delays in the mass adoption of Web3 technologies, so it makes sense to start building that trust and credibility right now.